July 18, 2012

The Impact of the $1 Million Mortgage Rule

On June 21^st, Canada’s Finance Minister introduced four new mortgage rules which took effect July 9^th, 2012. One of the new rules states that mortgage default insurance would be limited to homes under $1 million, thus properties over the million dollar mark will require a 20 per cent down payment.  

How many Canadians will be affected by the million dollar mortgage rule?

The answer: not many. According to CMHC data, out of all the mortgage loans they insure, only 5 per cent are for amounts greater than $550,000 (its highest bracket), meaning the percentage of homes worth $1 million or more with mortgage insurance is well below that 5 per cent mark. The majority of mortgages the CMHC insures fall within the range of $100,000 and $400,000.

To give you an idea of how small the amount of Canadians that will be affected by the million dollar mortgage rule; a total of 456,749 home sales occurred in 2011 according to the Canadian Real Estate Association (CREA), with a very small portion of those homes penetrating the million dollar terrain. An even smaller portion of those million dollar homes had mortgage insurance. When we asked James Laird of True North Mortgage to gauge the number of homes affected by the million dollar mortgage rule, he replied, “My guess is that only 3 per cent of homes sold for more than $1M are financed using a mortgage backed by mortgage insurance.” The Canadian mortgage broker also stated that he estimates high-end buyers typically put down 35 per cent or more, which is almost double the minimum down payment needed to avoid paying mortgage default insurance.  

What about Vancouver?

Housing prices in Canada vary greatly by geography and urban area. In particular, homes sold in Vancouver according to a House Price Survey and Market Survey Forecast by Royal LePage reveals that the average price has just hit $1.1 million, despite signs of the market slowing down. This would leave us to believe that Vancouver would be hit the hardest by the implementation of this new mortgage rule. Yet, Canada’s second largest mortgage insurance provider Genworth notes the average price of a home in Vancouver backed by their mortgage insurance is $453,000 –well below the reported average market price of $1.1 million. This leads us to believe that the impact of the new mortgage rule on home buyers in Vancouver will be minimal.  

Why implement the rule?

The million dollar mortgage rule will only affect a small number of Canadians, but as mortgage rates today sit at historically low levels, Jim Flaherty needed to send a message to Canadians: Mortgage default insurance is not a gateway to a more luxurious home, but protection for buyers entering the market for the first time.